Can an S Corp. Be Converted to an LLC?

By Edward A. Haman, J.D.

Can an S Corp. Be Converted to an LLC?

By Edward A. Haman, J.D.

You have your business set up as an S corporation but have determined that converting it to a limited liability company (LLC) would offer some type of advantage. The exact way to go about such a conversion varies from state to state, and may also vary based on tax considerations. However, there are generally several options on how to go about the process.

Because the conversion of a corporation to an LLC is controlled by state law, you need to research the requirements of your state. In general, there are three ways in which conversions are commonly accomplished, each of which is discussed below.

Regardless of the method used, you must still file the necessary documents to form the LLC, determine its management structure, and set up the desired tax treatment. The corporation also needs to issue a resolution and conduct a vote of shareholders to approve the conversion.

Here are the three most common ways to go about the conversion process.

1. Statutory Conversion

A statutory conversion can be viewed as a single action in which a corporation is turned into an LLC. As a special procedure authorized by state law, it is designed to simplify the conversion. If your state allows statutory conversion—and not all states do—the process typically involves filing the appropriate form with the state.

With a statutory conversion, the following events take place automatically with completion of the procedure:

  • The S corp. shareholders become members of the LLC.
  • The assets and liabilities of the corporation are transferred to the LLC.
  • The S corporation goes out of existence.

Check with your state's business regulation agency to find out what conversion procedures are available. This information, as well as the necessary forms and related filing fees, should be available on the agency's website.

Since a statutory conversion is the simplest method of conversion, it is the preferred method in most cases. If your state does not offer a statutory conversion process, the next best choice is a statutory merger.

2. Statutory Merger

As with a statutory conversion, you need to check with your state's business registration agency to find out the procedure, forms, and fees that are required for a merger. This time of conversion can be viewed as a two-step process:

  • Create a new LLC. The shareholders of the S corp. become members of the LLC. Of course, creating an LLC involves taking a certain series of actions, such as determining the management structure, preparing and filing articles of organization, and selecting federal tax treatment.
  • Merge the S corp. into the LLC. This also requires a series of actions, such as documenting a board of directors resolution authorizing the merger, having a vote of shareholders approving the merger, having shareholders surrender their stock in exchange for LLC member interests, and filing the appropriate merger documents with the state.

Usually, a statutory merger automatically transfers assets and liabilities of the corporation to the LLC. You may also need to file a form to officially dissolve the corporation, although this may be automatic as part of the process.

3. Nonstatutory Conversion

Similar to a statutory merger, a nonstatutory conversion involves creating a new LLC, then transferring the business operation from the S corp. to the LLC. However, a nonstatutory conversion involves more complex paperwork. Documents are needed to transfer assets and liabilities from one entity to the other and to convert shares of stock into interests in the LLC. The process of dissolving the corporation may also be more complicated.

Because of the number and complexity of the documents required, as well as the greater potential for significant tax liability for the S corp. shareholders, competent legal advice is highly recommended if you need to go through a nonstatutory conversion.

In most cases, you should be able to use a statutory conversion or merger. Just be sure to obtain qualified tax advice so that you fully understand the tax ramifications for the corporation and its shareholders.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.